William Lenehan III and Barbara Lenehan - Page 20




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          163(d)(4)(B)(ii).  This gives petitioners a $75,90016 long-term             
          capital loss, and therefore, zero net capital gain.  Net gain is            
          also equal to zero because total gains do not exceed total losses           
          ($49,017 less $75,900).  Therefore, petitioners have net                    
          investment income of $5,044 and an allowable investment interest            
          expense deduction of $5,044.                                                
               Petitioners selectively chose to include the loss carryover            
          when it placed them in a better tax position.  Thus, petitioners            
          included the loss carryover for purposes of calculating the                 
          $3,000 capital loss deduction.  If petitioners had not included             
          the loss carryover when calculating their overall capital loss,             
          they would have had an overall capital gain rather than a capital           
          loss.                                                                       
               We hold as a matter of law that petitioners’ loss carryover            
          is an integral part of the equation in calculating investment               
          income under section 163(d)(4)(B).  Were the loss carryover not             
          included, petitioners would receive a double tax benefit.  Under            
          petitioners’ approach, long-term capital gains would be offset by           
          the loss carryover and not subjected to taxation.  Then, those              
          same capital gains that escaped taxation would be used to                   
          increase investment income and, simultaneously, the investment              
          interest expense deduction.  Essentially, petitioners would                 


               16This is the sum of Schedule D, lines 8, 9, and 14 (-$3,601           
          +$69,322 -$141,621).                                                        






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